TL;DR
Most of the crypto tokens available today are scams or Ponzis. The FOMO and other behavioral factors contribute to people buying crypto tokens at their peak — and usually losing it all.
Ponzi definition: A Ponzi scheme is a fraudulent investing scam that generates returns for earlier investors with money taken from later investors.
I shared 4 main tips from the sanity check I always make sure I check before entering any investment. Scroll down so you can read it. And, trust me, take notes.
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Currently, on CoinMarketCap, there are over 20,000 tokens, which means over 20,000 different projects are being created and — in theory — developed. It’s safe to assume that most of them are scams or Ponzi schemes and that the creators primarily want to seize the opportunity of grabbing the cash of greedy and uninformed investors without any punishment or consequences.
Early VCs and yield farmers are usually the early investors in a crypto project. People who get in early usually have high returns, and when this happens, mainstream investors are attracted by the high yields. When they arrive, they’re the ones who pay for the high returns, but there’s a moment when there are no new investors to keep the projects running. These Ponzis rely on new investors to come in, or else they go down. So let me share a story with you.
A Ponzi Scheme in Four Acts
Act One
Ponzi schemes in crypto usually work this way. Act One: a token is created and a market value is determined, usually in a decentralized platform that doesn’t require KYC or other identification procedures. Early investors — such as VCs and the early yield farmers — are already on.
Act Two
A website and a whitepaper are made with the idea behind the project. These aren’t usually detailed and can even be a copy of other legit projects. After all, would the average investor really check the technical details?
These projects are usually located in DeFi platforms rather than centralized exchanges because the latter typically have a Due Diligence process to verify if the projects are legit before being listed. In DeFi, that’s where the risk is at. The truth is that most Ponzi projects will fail in Act Three: attracting investors since there are hardly even plausible reasons for a person to join the project.
Act Three
The main risk for the average investor relies on those projects that actually succeed in Act Three: they already got the attention of a few investors, and the community started to grow and eventually hit the mainstream. At this Act, several YouTube channels are covering the project, not to mention blog articles, Twitter, Telegram, and other social media. When you notice a buzz on specific crypto, that’s probably already late to join the project — if you want to gamble on it.
Prices start to soar, and people rapidly see 2X, 3X, 5X, and 10X returns (or even more) in a matter of weeks — especially those who were there first. The snowball effect continues; more people are talking about that project that made them double their returns quickly and “has no signs of stopping”.
That’s where the FOMO plays out. Your moron friend who never made smart investments put his money on a crypto project and is making profits while you’re there with your balanced portfolio. Your ROI might be good, but his is better now. So then, you decide to buy the token. You can even get 20%-30% in days, but you’re not satisfied yet. All of a sudden, we reach Act Four.
Act Four
In Act Four, no new investors are coming in and the price suddenly goes down 30%. You think it will recover. It even goes up another 30% a few days later (remember that you’re still down if this happens), but it keeps falling to ~99%. That’s the story of how you threw your money away.
In the backstages, what happened was: without new investors buying tokens (lower demand), the project leaders, early VCs and yield farmers started cashing out (were the tokens really locked up with a vesting period? Didn’t they simply buy or transfer thousands of tokens at minimum prices behind your back?) after seeing 1,000X-10,000X profits. There is no incentive for the team to keep building the project or to VCs to make it sustainable. The selling pressure is so high that prices go virtually to zero, and that’s how the Ponzi scheme ends.
Sanity Check — Four Tips for not falling for Ponzi anymore
The behavioral economy explains why people are tempted to join Ponzi schemes — the FOMO (fear of missing out) makes emotions stronger than the logic people usually have.
So always do this sanity check before you consider joining ANY crypto project — especially the dubious ones. Take notes or a screenshot, but don’t forget to do it:
1. Consider the risk-to-reward ratio: this will help you determine how much you’re willing to invest. Don’t invest what you can’t afford to lose. If you’re willing to lose up to $1000 or 1–2% of your portfolio considering the upsides, that’s it. Always consider the worst-case scenario.
2. Set stop-loss and take-profit levels: if a token’s price goes down, you’ll lose as much as you set. If it goes up, take some profit and rebalance the portfolio. If you happen to invest in a Ponzi project, a stop-loss will prevent you from headaches and regrets.
3. Get clearance on the project: understand in detail what the project does, who is the team/community behind it, validate if tokens are locked through on-chain research and if the tokenomics are sustainable in the long term. If you don’t believe in it, don’t invest. If there aren’t strong arguments in favour of investing, don’t follow the herd.
4. Practice mindfulness and meditation: as you’ve seen, investing & trading require mental techniques. Be aware of your stress, take breaks, and take action to realign your state of mind. Create healthy habits. It sounds silly, but it’s proven worthy.
Remember. There is no easy money.
Joe Robert is currently the Chief Executive Officer of Robert Ventures, with over 20 years of asset management experience. Since he started Joe has created predictable double-digit returns for investors & Partners. Joe has invested in seed rounds with equity and tokens, along with a portfolio of Bitcoin, Ethereum, and other top cryptocurrencies.
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